Leasing vs. Buying a Car: What's Right for You?

Friday, 16 November, 2018

Before
I bought my first vehicle, I had no idea
how many options there were. My whole life I assumed I had to save up for years
and pay for it in-full before I drove off the lot. When I first started in the
automotive industry, it was a shock to realize that not only could you purchase
a vehicle and make payments on it - but there were actually a few different
options available based on what each unique person needs. The the two most
common purchase options that we use at Crosstown are leasing and financing. How
do you know which is going to be best for you? Below I’ll outline some of the
key differences (and similarities) between leasing & financing to help you
make an informed decision when it’s time to purchase your next vehicle. To reallyknow which is going to be best for your unique vehicle purchase,
get in touch with one of our Sales Specialists to get the conversation started.

Let’s start with the basics. What does it mean to
lease or finance a vehicle?

Who
doesn’t love a good food analogy? If you think about the entire vehicle
purchase price being a whole pie. Financing would be like cutting the pie into
equal slices, where each slice is a payment. Leasing on the other-hand, is like
cutting out a portion of the pie to save for another day...and then cutting the
remainder of the pie into equal slices.

I’ll
elaborate…

Most
of our customers at Crosstown choose to finance their vehicle rather than
lease. Simply put, financing gives you the option to make payments on the
entire amount of the purchase price. These payments are split into equal monthly,
bi-weekly, or even weekly amounts based on a term that ranges anywhere from 24
to 96 months. You also need to take into consideration the interest rate that
is set by the lender. Based on your personal credit profile (and a variety of
other factors), these rates can be anywhere from 0% up to 20%+. Why is
financing the most commonly chosen purchase option? It’s a lot easier to
explain & there are fewer moving parts that affect the final monthly
payment amount. Fear not - by the time you’re done here, you’ll be able to
understand which option is best for you!

Like
I said above, there are many moving parts that affect the final monthly lease
payments on a vehicle. A lease payment is calculated by looking at the expected
residual amount of the vehicle at the end of the lease term. The residual
amount is the expected value of the
vehicle when the lease term ends, this is typically a percentage of the MSRP
that is set by the manufacturer. These percentages change each and every
month.The residual value is the piece
of the pie we’re setting aside for later. So now how does the rest of the pie
get split up? Just like with financing, you first have to choose the term of
your lease which typically is between 24-60 months. Next, you need to know how
many kilometers you drive (on average) per year. Now this is where things can
get confusing….depending on the term you choose and the annual kilometers you
choose, the residual value can increase or decrease. On a very basic level the
rule of thumb is this - Short term, low kilometer allowance? Higher residual
value & lower payments. Longest term, high kilometer allowance? Lower
residual value & higher payments.

Now
that you have a basic understanding how each option works. How do you know
which is going to be best for you?

Will you be buying new or pre-owned?

This
is an easy one. If you’re buying a pre-owned vehicle, financing is going to be
the only available option with Crosstown. On a pre-owned vehicle purchase, the
term & interest rate will be based not only on your credit profile, but
also on the vehicle’s age & kilometers. The older the vehicle & higher
the kilometers, typically means that the term will be shorter.

When
purchasing a new vehicle, you have the option to choose between leasing &
financing. In the following sections, I’ll be comparing the two and assuming
the purchase is on a new vehicle.

How will you use your vehicle?

I bet
you didn’t think that how you buy your vehicle would be impacted by how you use your vehicle? In many cases - it
really won’t make a difference...but if either of the examples below appeal to
you, leasing might be a great option to consider!

If
you have the option to write-off your vehicle use on your taxes, leasing is a
great option to consider. Recording & calculating what gets written off is
significantly easier on a leased vehicle vs a financed vehicle. Your accountant
will thank you when tax-time comes around!

Driving
less than 20,000 kilometers on average per year makes you a “low kilometer”
driver. You may want to consider leasing if you fall into this category! You’ll
be able to take advantage of lower possible payments than if you were a “high
kilometer” driver. Beware! If you exceed your kilometer allowance over the term
of your lease, you will likely be responsible for excess kilometer charges.

How often do you get a new vehicle?

If
you’re known as “the one who always has a new car”- or you want to be that
person. Leasing was made for you! As lease periods are shorter than the average
finance term, leasing gives you the freedom to upgrade to a new vehicle more
frequently and without any pesky loan carryover (aka negative equity).

With
the average finance term around 84 months (7 years), trading in before the end
of your loan is quite common in our area. However it can result in owing more
on your loan than your vehicle has been appraised at. This difference between
loan and vehicle value can be carried over to your new loan and included in the
monthly payments moving forward. Financing is a great option for those who tend
to keep their vehicles over a longer period of time or are comfortable with the
scenario mentioned above.

Know where you stand financially.

This
is important to know regardless of
whether you are leasing or financing. The stronger your credit, the less of a
risk the lenders feel they are taking and the more likely you are to qualify
for the lowest rates. Leasing is typically an option reserved for above average
profiles with strong repayment history. If you’re not sure where you stand, our
team of specialists are more than happy to help! Find our easy online pre-approval form
here.

Let’s
be perfectly honest - there are so many things that I could tell you about
leasing and financing and I’ve only just barely scratched the surface. I hope
that the information above has given you a better idea of whether leasing or
financing your next vehicle is the better option for you. Have more questions
or want to pick out your next vehicle? Give us a call today at 780-488-4881 or
browse our inventory online!